Cotton fundamentals not behind price spike

Elton Robinson, Farm Press Editorial Staff | Jul 30, 2009

A July run up in cotton prices that occurred even as fundamentals for cotton were decidedly bearish was likely a big reason why analysts at the Cotton Roundtable in New York City were having a tough time projecting a potential range for December 2009 futures prices.

“One month ago, we all agreed that we’d have highs around 60 cents or so,” said Mike Stevens, with Swiss Financial Services. “We never dreamed what we would see in the 17 sessions leading up to (late July highs). I think realistically, from a fundamental point of view, 65 cents is going to be the high. From a technical standpoint, the specs can take this market a lot higher than they should and a lot higher than we think they can. On that, I would have to raise my projected price level to 70 cents.”

Stevens emphasized that the move to 65 cents in late July “was on basically bearish fundamentals. Fundamentally, we can’t justify where we are right now, much less it going higher. But try telling that to these money managers buying those first dips every day. It’s tough to call. You have to separate the technicals from the fundamentals, but when you’re marketing a crop you have to pay attention to both of them.”

“We’ve got some uncertainty involved in the 2009-10 crop,” said Carl Anderson, Extension professor emeritus, Texas A&M University. “What’s going to be the size of the crop in the world, and will there be an economic recovery? Those questions create in a lot of twists when looking at prices. I see December 2009 in the 60-65 cent range, but if we get a few shocks, like the U.S. crop being lower than we expected, we could see prices rise to 66-68 cents. On the low side, we could see 58 cents.”

Joe Nicosia, chief executive officer of Allenberg Cotton Co., said simply that U.S. cotton must be competitive. “I learned a long time ago that the range is substantially wider than anybody can imagine. If you ask if it could trade at 50 cents, I’d say absolutely. If you ask if it could trade at 75 cents, I’d say absolutely. There could even be a 4 in front of the price, or there could be a 7 in front of the price.

“I struggle with what happened in the last three weeks when the nearby futures went to 65 cents, the deferred went to 72 cents and the amount of cotton that began to trade in the world outside the United States was substantial, we’re talking millions of bales.”

But U.S. cotton was not being traded, said Nicosia. “If you look at the open interest and hedging taking place, it was foreign cotton being marketed at those price levels. We have to remember that China has 20 million bales in its reserve program. That’s a crop and a half in the United States. They’re selling 55,000 tons a day out of their reserve.

“As we look forward to 2009, I think cotton can trade substantially higher or substantially lower. But it’s my guess that we’re going to have to slide down to the mid-50s to find export homes and shut off the foreign competition.”

Jarral Neeper, president of Calcot, Bakersfield, Calif., sees a “16-cent to 20-cent range on cotton this next year and probably 50 cents to 52 on the low side and 72 cents on the high side. To get up there, you’re going to have to have the specs driving the market. I don’t think the trade can do it unless you have a crop disaster in the United States, an early freeze or something happening with quality in the crop.

“Right now, we’ve seen three weeks of export sales that have been pathetic that supports Joe Nicosia’s comment that we’re not competitive in the market. If we’re going to sell U.S. cotton, we’re going to have to move back down.”

O.A. Cleveland, professor emeritus, Mississippi State University, agrees that cotton has to be priced to move into the export market. “Something with a 7 in front of it on the high side would not surprise me, nor would something with a 4 in front of it on the low side. For me, it’s about figuring out where the market is going to have to go for volume to occur, where is the market going to have to spend a lot of time. I am surprised that cotton went to 65 cents.

“I’m a bit bearish and I think we’re going to spend lots of time in the mid-50s and low-50s, based on the current weather situation. If you have an early frost in Texas, the market is going to heat right up. But the varieties that we have today, even under weather-difficult times, I think we’re going to have a crop bigger than we think.”